Survey predicts stability for homebuilders

NEW YORK — The outlook remains stable for U.S. homebuilders, but a sharp economic slowdown next year could send the sector into more trouble, according to Fitch Ratings.

The housing market is currently experiencing a correction, which has been “largely precipitated by affordability issues and poor buyer psychology with excessive inventories aggravating pricing and margin pressures for the companies,” said Fitch in a report published Thursday.

Home prices appear to have peaked and are already starting to come down, fueling concerns from buyers who are putting their purchases on hold.

The National Association of Realtors on Monday said its index for pending sales of existing homes decreased by 1.7 percent in October from the previous month. That’s a 13.2 percent cut from October 2005. The index is based on signed contracts for used homes.

The weakness in the housing sector is likely to continue in 2007, Fitch said, adding that although credit ratings shouldn’t be impacted, it will ultimately all depends on the turn the U.S. economy takes.

“In this period of stress and rather uncertain times, it’s somewhat difficult to forecast when things will bottom and then turn up,” said Bob Curran, managing director and lead homebuilding analyst at Fitch, in a conference call the credit ratings agency held Friday morning.

Fitch noted that “liberal and innovative lending standards of recent years could become a problem when the economy dips again.”

Lenders have allowed buyers to use higher percentages of their income toward their mortgages and have established lower cash down payment requirements. “All indicate a deterioration in credit worthiness,” according to Fitch.

Nevertheless, homebuilders were better prepared this time around to face the current housing downturn, Fitch said.

They had diversified their business geographically, especially through mergers and acquisitions. They had also used options to buy land instead of directly buying it, which reduced losses when they started receiving order cancellations.

Fitch anticipates homebuilders will continue to cut back on land purchases during the remaining of 2006 and in 2007. That should lead to a decline in inventories and to improved free cash flow, it added.